Vice President of the European Commission responsible for Competition Policy

Speech: State aid reform and the new Regional State Aid Guidelines

Committee of the Regions plenary session

Brussels, 1 February 2013

Ms President Bresso,Distinguished members,Ladies and Gentlemen:

It is always a pleasure for me to meet the representatives of Europe’s regions. I thank the Committee for inviting me to speak at your Plenary Session.

I felt it was necessary – to reinforce the already good dialogue between the European Commission and the Committee of the Regions – to have this public debate right after your discussion on the new Regional Aid Guidelines that the Commission plans to adopt before the summer.

I take the opportunity to thank the rapporteur of your opinion – Mr Denanot – for his precious contribution, which we discussed during our meeting in early December.

I am happy to note that the opinion broadly supports the spirit of our review. I am also grateful for the many recommendations that will help us improve the current draft.

The new Regional Aid Guidelines will include important substantive changes, including some that are closely linked to the use of Structural Funds under the next Multiannual Financial Framework.

As you know, this revision is part of our broader State aid modernisation strategy. After tabling proposals for modifying the Enabling and Procedural regulations and the adoption of new guidelines for the broadband sector at the end of last year, our strategic initiative will really take off in 2013.

The new Regional Aid Guidelines will be the first to be finalised this year and it seems to me that they come at the most opportune time.

In the aftermath of the financial crisis, public subsidies that promote investment in Europe’s less developed areas can make a real difference.

And they can help EU governments spend taxpayers’ money more wisely and more effectively at a time when most public budgets need to be consolidated – including in all probability the EU budget.

In this respect, the new Regional Aid Guidelines will translate into tangible policies the principles of the State aid modernisation strategy.

They are designed to help Member States do more with less – that is, improve the efficiency and quality of their spending;

They will include increased requirements on the transparency and evaluation of State aid;

They will be streamlined and aligned with the Europe 2020 objectives; and

They will allow us to better focus our review of state subsidies on the cases that have a genuine and significant impact on the internal market.

Ladies and Gentlemen:

What is the rationale of our revision of the guidelines? Our new rules need to respond to three main factors:

First, regional disparities in Europe have narrowed in the past decade. This is excellent news, because it means that the EU is still a convergence machine. But this convergence only makes it more necessary to concentrate efforts on the poorest regions.

Second, obviously, come the challenges posed by the crisis; weaker economies, unemployment and social exclusion – particularly youth unemployment – and the pressure all this puts on public budgets.

The third factor is the fact that, even in this uncertain economy, some Member States still have deep pockets while others are forced to downsize their support to business.

Looking at this picture, we must modernise our control over government subsidies and align it with the challenges of our times. More than ever, we need to minimise the competition distortions that may be caused by them and leverage private investment.

To focus government support on the less developed regions, we propose to concentrate the geographical scope of regional aid, a reduction in the maximum permissible levels of aid, and a more targeted approach with regards to the type of investments or companies that can receive regional aid.

Helping Europe’s governments spend better means ensuring that the aid is not wasted and that it goes to investments that would not take place without the aid, and that therefore bring real value added and regional development.

I also believe that this policy environment calls for a rebalancing of our enforcement priorities. Therefore we propose a simpler treatment for non-distortive aid and greater attention to the aid that can significantly restrict competition.

Finally, the new guidelines will provide better guidance to the authorities in the Member States on how to design and monitor aid measures and policies.

This, in brief, is the spirit of our reform of the Regional Aid Guidelines. Let me now comment more concretely on the changes we propose.

The first issue I would like to stress is the overall population coverage, which serves to identify which regions are eligible for regional State aid.

Today, only about one in four Europeans live in the least developed regions, compared to one in three at the time we adopted the current rules.

In view of this reduction of disparities, we originally proposed to set the overall population coverage at 42% of the EU population.

However, having considered all the arguments, I think that it is warranted to keep the current level of population coverage of 45% also for the future guidelines.

This will allow both to keep focus on the regions that are most in need from an EU perspective, and to give national and regional authorities sufficient room to tackle internal disparities.

Another important point is deciding how many of the eligible regions are to be pre-defined at EU level, and what flexibility is left for Member states to decide on the remaining regions.

From an EU perspective, the regions most in need are those with a GDP per capita below 75% of the EU average and the regions which were below 75%, have shown economic development, but remain below 90% of the EU average.

Similarly, regions with permanent disadvantages, such as outermost regions or sparsely populated areas, can also be pre-defined by the Commission.

The remaining population coverage will be distributed between Member States according to objective criteria which will take into account both national and EU disparities. And it is for national authorities to decide on the internal allocation.

These national debates on regional policy are important. Sometimes, in my many discussions with stakeholders, I hear requests for the Commission to pre-define this or that type of region.

As to the rest, national debates must take place – and national, often difficult choices must be made – on how to tackle the remaining internal disparities; such as the specific needs of islands, border regions, and other areas.

I believe that our proposal strikes the right balance between EU-level decisions on which are the regions most in need, and flexibility for Member States to supplement this with national decisions.

Sometimes I also hear remarks that the final map of the so-called "c" regions eligible for State aid under the regional aid guidelines and the map of "transition regions" eligible for structural funds are not identical.

Some say that this would make cohesion policy and regional-aid policy inconsistent. I do not agree with this view.

Indeed, the maps will not coincide – as they don’t coincide at present. But this does not mean that there is inconsistency, because cohesion policy and regional-aid policy use different instruments.

For one thing, only a fraction of structural-fund measures takes the form of State aid, as a large part of them are not used to support business directly.

Secondly, State aid measures which are co-financed by structural funds can be assessed and approved by the Commission on the basis of other guidelines, such as those for research, development and innovation, risk capital, and the environmental or broadband guidelines – and these kinds of aid are available throughout the whole territory of the EU.

For example, according to our estimates, only about one third of ERDF co-funded aid measures has been assessed on the basis of our regional-aid guidelines; the rest was found compatible on the basis of other thematic rules.

Thirdly, capping aid to what is strictly necessary is crucial to prevent subsidy races between Member States at a time of tight budgetary constraints.

Taking into account – as I said earlier – that the gaps between Europe’s regions have narrowed in the past decade, we propose to lower aid intensities except for the worst-off regions.

Regions should invest in lasting and structural improvements instead of luring mobile capital from one region to the next, creating windfall profits on the way. This is why I decided to strengthen the provisions against aid-induced relocations.

Another major element of the reform is a new focus on ensuring the value-added of aid measures by requiring that there be a more rigorous evaluation of their incentive effect.

This means that the aid must give companies an incentive to invest or set up operations in an assisted area, which they would not have undertaken otherwise.

When well-designed aid measures do this, they can contribute to the economic development of entire regions.

However, there are many factors that attract business to a region, and subsidies should only be used when they can tip the balance and trigger new investment and new jobs.

Empirical evidence shows that in most cases subsidies are not the main reason to invest in a region. Other factors drive investments; such as the availability of a skilled labour force, of infrastructure, and of natural resources.

Investment decisions are also a function of labour costs, growing demand, and competitive pressure that pushes companies to modernise existing production facilities. Our own experience in the enforcement of State aid law confirms these findings.

In addition, a strong body of evidence suggests that regional investment aid is more effective and efficient when it is geared towards SMEs rather than large firms.

I don’t mean to say that large firms do not contribute to regional development; they certainly do. But large enterprises would often have made the investment in assisted regions even without financial support.

Giving subsidies in these circumstances amounts to handing out “free money” to firms. In many occasions, this leads to a waste of public resources which we simply cannot afford. This also leads to competition distortions in the internal market with damaging effects on growth.

Given this evidence and our own experience, we propose to allow regional investment aid to large companies only in the least developed regions – the “a” areas – where the balance between the contribution to development and the distortion of competition is more favourable.

Let me stress here that we will continue to authorise aid to large firms in “c” areas and other regions, provided it meets the Europe 2020 objectives, such as research, development, innovation, and environmental protection under the respective sectoral State aid guidelines.

Another major element of our reform regards the proportionality of aid and the aid-intensity ceilings.

Our objective here is striking the right balance. On one hand, the regions most in need must be in a position to attract the investment they need to grow; on the other hand, the aid must be limited to what is necessary to attract those investments.

In addition, in line with the broad objectives of the State aid modernisation strategy, we want to simplify the treatment of smaller cases – in particular SMEs – and therefore will propose that fewer categories of aid must be notified to the Commission.

The scope of block-exempted aid will be widened and the rules simplified so as to allow a better focus on the most distortive measures and quicker decisions at national level. The rules for block-exempted aid will be laid down in the new General Block Exemption Regulation which is now being prepared.

Finally, I would like to mention two more proposals that will make State aid policy more transparent and more effective.

The first requires Member States to publish on the web the main data regarding the aid that they grant.

This will increase transparency and accountability and corresponds to what is currently done under the Structural Funds and for direct payments under the Common Agricultural Policy.

Also – as is already the case in some Member States – we are considering requiring an ex-post evaluation of selected large aid schemes.

The aim is to check if the aid has achieved the results that were intended when it was approved.

These evaluations should serve to improve the design of future measures. They should also help to make a better use of public resources.

I am convinced that aid granting authorities – including regions – would benefit from these new transparency and evaluation requirements because, thanks to them, everyone will know what the others are doing and be sure that everyone plays by the same rules.

To conclude, let me tell you where we are in the process that will lead to the adoption of the new guidelines which, as I said, is planned before the summer.

A draft of the new guidelines has been sent to Member States, your Committee, the European Parliament and the European Economic and Social Committee, which is also preparing an opinion.

This draft is also available on the website of DG Competition. I invite all stakeholders to give us their views by the 11th of March, when the consultation closes. The draft will also be discussed with Member States shortly.

So, there will be many opportunities to improve and refine the guidelines before the Commission formulates its final view.

The new Regional Aid Guidelines and, more broadly, the State aid modernisation strategy engage all levels of government.

They offer a policy platform that national and regional governments can use to give their support to the economy a genuine European dimension and a larger impact on growth.